By Dr. Jim Dahle, WCI Founder
I am often asked whether it is better to take a job as an employee or accept a job as an independent contractor or some other version of being self-employed. The short answer is “it depends.” The best answer may be “both.” Let me explain.
Upsides of an Employee Job
There are a few significant benefits of an employee job.
Simplified Taxes
An employee is paid on a W-2 Form. Their taxes are relatively simple to file. Their employer pays the employer half of payroll taxes (Social Security on the first $160,000 of earnings [2023], and Medicare taxes on all earnings).
Employee Benefits
The employer may also offer some sweet benefits—like a 401(k) with or without a match, some portion of the premiums on health insurance, and maybe even some portion of the premiums on a group disability or life insurance policy. To the right family, these sorts of benefits can be very valuable.
Downsides of Being an Employee
There are two significant downsides to being an employee.
Unreimbursed Business Expenses
The first is that you can't deduct unreimbursed business expenses. Before the Tax Cut and Jobs Act of 2017, an employee could use Schedule A for those expenses, but they were subject to a floor of 2% of their income. For a physician earning $200,000 a year, that meant the first $4,000 of unreimbursed business expenses were not deductible at all. But now it's nearly impossible to deduct any unreimbursed business expenses. At least until 2026 when the Tax Cut and Jobs Act expires. That sucks.
Not So Sweet Benefits
The second downside is that you are stuck with whatever benefits (especially retirement plans) your employer sees fit to offer you. If the maximum contribution is low or if there is no match or if the expenses are high or if the investment options are bad, well, you're stuck with it. If your health insurance is crappy, you're welcome to go buy a plan on the open market, but if the employer is paying the premiums, it's usually a take-it-or-leave-it situation. It's the same with other employer-offered insurance.
More information here:
Downsides of Self-Employment
More Complex Taxes
An independent contractor is paid on a 1099 Form. Their taxes are a bit more complex because they are both the employee and the employer. So, they must pay both halves of the payroll taxes, although the employer half is tax-deductible.
No Automatic Benefits
They also get no benefits except what they are willing to purchase for themselves. Since the employee is just one person, they get no benefits from an economy of scale when it comes to benefits (including malpractice insurance). If they want group disability or life insurance, they will need to get it from their specialty society.
Upsides of Being an Independent Contractor
Tax Deductions
Their work-related expenses are 100% deductible on Schedule C. Work-related expenses that go on Schedule C are far better than those that go on Schedule A because there is no floor. They also get to deduct their health insurance premiums, HSA contributions, and retirement plan contributions, which are all above-the-line deductions.
Choosing Your Own Benefits
Best of all, you get to choose your health insurance plan; your HSA; your 401(k); and, if desired, your personal defined benefit plan.
More information here:
Locum Tenens: What Physicians Need to Know
How to Get Locums Work Without a Locums Agency
Which Job Should You Take?
If you find yourself comparing an employee job to an independent contractor job and you like both equally but are unsure which one pays more, it is best to try to do an apples to apples comparison.
First, take the employee job's salary and add to it the value of any benefits that you actually think are valuable.
Definitely consider any available
- 401(k) match,
- HSA contributions,
- Paid CME or vacation,
- Any premium assistance on your insurance policies—such as malpractice, health, disability, and life.
Then, add in an amount equal to the non-deductible portion of the employer's half of your payroll taxes.
For Social Security, that is 6.2% × (1- your marginal tax rate) × $160,000.
For Medicare, that is 1.45% × (1- your marginal tax rate) × your entire salary + 0.9% × (1- your marginal tax rate) × (your salary – $200,000 or $250,000 if married).
Then, take what you would be paid as an independent contractor and subtract the value of the deduction on everything you could deduct that you could not deduct as an employee.
This might include the cost of
-
- Uniforms,
- CME expenses,
- Employer half of payroll taxes,
- Health insurance premiums,
- HSA contributions.
If the employer-offered retirement plan is crappy, you can also assign a dollar figure to the ability to choose your own.
Now, compare the two values. If one is dramatically superior to the other, you're done (or at least you can use that in ongoing negotiations). If not, then choose the job based on other factors.
As a general rule for a physician with an income near the median physician income in the $250,000 range, I would estimate that a typical independent contractor job ought to pay about 10% more to be equal to the typical employee job. But that rule of thumb is worth about what you paid for it since there is so much variation out there.
The Best of Both Worlds
Perhaps the best of both worlds is to get some of your income as an employee and some of your income as an independent contractor. That way you can write off all your work expenses that are required for your independent contractor job (but are used for both jobs—like CME, uniforms, licensing fees, DEA fees, specialty society dues, etc.) against your 1099 income. This way also lets you have your employer provide your benefits and at least the employer portion of the Social Security taxes, which are the lion's share of the payroll taxes for a doctor with a median physician income.
Another bonus of having two jobs is you may get two 401(k)s as well, allowing you to protect more of your hard-earned money from both Uncle Sam and any potential future creditors.
A Note on Partnerships
Many doctors, including me, are members of a partnership, which is often formed into an LLC and is paid on Schedule K-1/Form 1065. This has a lot of the benefits of being an independent contractor (lots of easily taken deductions) with a few of the benefits and downsides of being an employee. For example, you may get an economy of scale when negotiating benefits.
However, you are probably also subject to the rules of your partnership 401(k) and other retirement plans.
What do you think? Are you paid on a W-2, 1099, K-1, or all of the above? What do you like about it, and what don't you like about it? What would you recommend to other physicians? Comment below!
[This updated post was originally published in 2015.]
I have questions on the self employment tax. I work as a 1099 and as an employee. I’ve maxed out my social security taxes as an employee ($7,347). If I earned an additional $50,000 as a 1099, will I only be responsible for the 2.9% medicare portion of the self-employment tax since I’ve paid the max SS tax already?
Also, my total income will exceed $200,000, but neither my 1099 or employed income will independently exceed $200,000. Is it correct that I will still be responsible for paying the extra 0.9% medicare tax on earned income exceeding $200,000 regardless of the source? Thanks!
Yes.
Yes.
I am to become a partner in a multispecialty llc with 170 physicians. I am currently on w2 but my accountant wants me to form professional corporation in Georgia when I become a partner. I will have fixed w2 salary~270k and the rest will be distribution~200k. This should help decrease FICA tax on the distribution. The group has limited 401k contribution for younger physician maxed at 32k including profit sharing/match (eventually from my production as I am partner). Do you see any way around to contribute more? Cash benefit plan through PC? Already wife maxes her 401k. Backdoor Roth’s also have been setup.
I think you’re stuck with the partnership plan, but would love to hear I’m wrong and you can get your own 401(k), but that’s not my understanding. I agree that filing taxes as an S corp (whether you are a corporation or an LLC) probably makes sense for you.
I became a partner of a hospital last year. I set up a S Corp and receive K-1 from the hospital . The hospital had a deduction of $18K for my 401K, $35K for my 401K Match, $5K for dependent care, and $30K for my defined benefit, which these amounts showed on my K-1. I am an employee of my S Corp, in which I receive a paycheck every month. Now, my question is: should I add my 401K amount of $18K, dependent care, and my defined benefit to my W2, box 10&12, and deduct $18K+$30K=$48K from my wages, which is box 1? Or should I just leave it a blank on my W2, and have them pass-through from my K-1 when I file my tax return?
I’m no expert. You may try asking in the forum. But my best guess is that the dependent care goes on line 10 and the rest goes on line 12.
Like the 10% estimate. What would it be for K1 vs W2? This take into account tax savings for increased pretax contribution limits?
About the same 10% for an emergency doc I’d say. But that’s a rule of thumb with all the problems that implies. If it were my case, I’d run the numbers myself with the taxes and benefits.
My wife is a family physician employee, paid on a W-2 by a privately owned practice. She isn’t an owner, or partner, etc. The practice recently affiliated/merged (not totally sure on the nature of the agreement) with a national medical group, who is saying they’re going to start paying most of her salary via a K-1 instead of W-2. A small portion will be issued as W-2 income via a third party benefits administrator. They also said they’ll adjust pay upward to account for the extra tax burden. Will we still owe ordinary income tax on K-1 income, or is K-1 subject to corporate/business tax rates? I assume that would be better for us, but if it’s wrong (since she isn’t a business owner or partner), I cleary don’t want to run afoul of the IRS.
Ordinary income, but you may qualify for the new pass-thru deduction. If they’re paying you on a K-1, you’re a partner in the eyes of the IRS. Schedule K is part of a partnership return. Look at the top of the form:
https://www.irs.gov/pub/irs-pdf/f1065sk1.pdf
Thanks for the quick response. Much appreciated.
I don’t grasp how she can become a Partner without having to buy-in to the parntership, but that seems to be what’s happening. They’re saying it has something to do with being a Managed Care Organization/MCO, so that they can bill for all physicians under a common TIN.
It seems odd to get a fixed salary via a K-1 instead of getting business profit through it, but at least it’ll still be taxed as ordinary income as you said (so at least at least it doesn’t look like we’re trying to dodge any taxes we legitimately ought to be paying). I’ll keep reading up on this topic, but at least it feels less shady than it did when I first heard they were doing this.
Thanks for all you do throughout the WCI Empire!
Nearly all my income was on a K-1 last year. It’s no big deal.
Correct me if I’m wrong, but I don’t believe the equivalent value calculation should include the .9% tax on wages above $200K ($250k married) as that is not paid by the employer.
Also, I think State and Federal unemployment taxes would need to be added in, no?
You’re right. The 0.9% is on the personal side. You’re the first one to catch that error in 2 1/2 years. Unemployment taxes only apply to S Corp owners. I just paid them this year for the first time. A sole proprietor/partnership/LLC being taxed as a sole proprietor or partnership doesn’t pay those.
Quick on the response — great!
Do you have any ‘new math’ coming as a result of the tax plan change? I guess that may not apply to 1099 so much as business structures.
If you can qualify for the pass through business deduction, that would certainly help the cause. Many docs won’t, of course. This might be a topic worth hitting again though. Seems like you’re doing fine with the math though, not sure why you need me to do it for you!
Fair enough! You never know what you don’t know… I feel like there is probably plenty I am missing. Quite the resource here on WCI to help however. Thanks
Thanks for posting this. Just starting out and seeing my fellow graduates sign their contracts some W2, some 1099. I was trying to figure out my equivalent 1099 to understand if I made the right (financial) choice and what I should be looking out for.
My W2 base is ~250k whereas my equivalent 1099 would have to be ~350k. This does not including the pension plan but could add another $100k/per working year if I were to remain in the same group for 20 years. Would be absolutely brutal trying to clear 450k as a 1099…
For those of us who earn both W2 income and 1099 income, does anyone know of a way to calculate an effective tax rate on W2 income and an effective tax rate on 1099 income separately, rather than just calculating an effective tax rate on all income lumped together? I’m asking because I have several opportunities to pick up moonlighting income, some of which are W2 and some of which are 1099. I always struggle with trying to estimate which results in the greatest after-tax hourly rate. The 1099 opportunities typically pay a higher pre-tax hourly rate but I’m trying to understand whether self-employment taxes end up making these less efficient earning opportunities. I’ve been staring at my TurboTax documents from 2017 for about 45 minutes now and I can’t figure out the best way to do this… Please help if you can!
The difference between the marginal tax rate on an additional dollar of W2 income versus an additional dollar of 1099 income is likely not enough to use that as a decision maker as to which additional opportunity to take. I would think there would be several more important factors.
I say this because I’m presuming you’ve already made enough to have paid all the social security tax you’re going to pay for the year. That’s $128,400. So on W2 income above this you’re paying 1.45% medicare tax, on 1099 income you’re paying 2.9% medicare tax. They’re both going to be ordinary income taxed at your marginal federal tax rate, plus state tax. So another 1.45% tax on 1099 income. Again, not enough to worry about. Just take the job you like more, or that pays more, or that’s better hours, or closer to home, or is with people you enjoy, or has a great EMR, or whatever.
I may need to be corrected on this, but I believe the tax diff at play is more than just the additional Medicare tax; and actually, my understanding is that the Additional Medicare tax applies to both W-2 and self-employment income, so there wouldn’t really be any difference there. (Again, I may need to be corrected here.)
Employer Payroll tax becomes your self-employment tax in 1099 work, so the 7.65% that the employer pays on your behalf as a W-2 employee, which is an amount you never see (it’s separate from the tax they withhold from you), becomes your responsibility; and, there’s no $128k cap on employer payroll tax (or on that portion of self employment tax). I believe it counts as an above the line deduction though, so after that, comparison to a W-2 offer is much easier.
Quick ex:
W-2 job pays $100/hr
1099 job pays $110/hr
110 * (1 – .0765)
110 * (.9235)
= 101.585
So, the 1099 job equates out pretty close. Regarding the extra Medicare tax of 0.9%, I believe that applies to both W-2 and self employment income, so I don’t think that’ll affect your math in any way.
There is a cap on that tax- you only pay it on the first $128K. However, there is a situation where you can get burned. If you have an S Corp (or LLC paying as an S Corp) and a separate W-2 job you could pay more than your share of SS tax.
Thanks WCI. My bad; I went digging again and figured out what rules I was crisscrossing. I was thinking that an employer’s 6.2% payroll tax wasn’t capped either, and that that uncapped burden was kept for the employer half of the SE tax. But, nope, you’re right; employer’s 6.2% payroll tax is also capped.
I think I went off the rails because I had a subsidiary spinoff issue some years ago where we worked through the SS tax implications of a midyear spinoff and how employees vs the company would be impacted; I think the issues there may be related to the S Corp issue you referenced. For regular employees, we can recoup extra SS tax paid to two different employers in the year if totalling above the cap, but the parent company couldn’t collect that back, as I recall. The SS tax cap is FEIN specific, so a parent company with multiple FEINs who moves an employee between them midyear may end up paying more in SS tax, depending on the person’s pay rate.
Anyways, thanks for the clarification. You are greatly appreciated!
Yea, totally unfair but that actually happens a fair amount.
Exactly. Jacoavlu nailed it. Not a big factor.
It shouldn’t be that hard. If you’ve already maxed out SS taxes for the year, your effective tax rate on 1099 income will be about 1% higher than your effective tax rate on W-2 income because you’ll have to pay the employer share of the Medicare taxes (although not the full 1.45% because it’s deductible to the business.)
I am an FP ED physician recently hired in 2016 by team health as an IC paid via RVU’s. I have always questioned the legitimacy of the irs status, and apparently it is being questioned, so it may all be changing, but as I am only 10 years from retirement I have been taking advantage of socking away first the Sepira $55k max and just now opened the i401k to get the $6000 catch up. My cpa thinks it’s all legit, including being eligible for the pass through in 2018. My taxable income is below $315k. But you made mention that “most physicians won’t be.” What are referring to?
The $315K taxable income limit refers to both your and your spouse’s income. Lots of docs make more than that themselves. The single earner limit is just $157,500. 95% of docs probably make more than that.
I am currently employed as a W2 employee at my main job but am also employed through a number of other companies as a 1099 independent contractor. I have been offered a new opportunity as a consultant and the company is offering me the opportunity to be paid either as an independent contractor or a W2 employee. If I sign as either a W2 or 1099 employee, the company will still reimburse all of my travel expenses and provides a daily per-diem when traveling with them. I do not anticipate many expenditures related to working for the company that I would be able to write off. Thoughts about which option I should take?
Thank you for your consideration.
First, you are not “employed” as an independent contractor. Another business is contracting with your business to provide services. It is helpful to keep that straight.
Second, it doesn’t matter much so long as you compare apples to apples. For example, if you are an employee, the employer pays half of the social security and medicare taxes and likely some benefits. As an independent contractor, you have to pay all that on your own. It is a little easier to write some expenses off and you get more control over your benefits, but as a general rule for docs, I like to see you being paid about 10% more to be an IC than an employee to even it all out. If the pay is the same, be an employee.
I am a W2 employee with an academic medical center. I also do some per diem work with a private group as a 1099.
1) if I use my W2 CME funds to pay for licensing expenses, can I still deduct these expenses from the 1099 income? This seems like double dipping…
2) I get my health insurance through my W2 job but pay a portion of the premium. Can I deduct these premiums since I have 1099 income?
Thanks so much!
1. No, that’s double dipping.
2. That’s a good question. I don’t think so but I’m not 100% sure.
1 – that seems like double dipping because it is. If your W2 job paid for your CME, you can’t also deduct it as a business expense.
2- I feel pretty comfortable that you could deduct the employee paid portion of your health insurance as an expense against your self-employment activity. You’ll want to confirm with tax counsel but I feel 82% confident in that deduction.
Hello,
I had a quick question
I have a job one year that pays a 1099 (locums job) <6 months per year
I know I can deduct lodging, per diem meals, and transportation
I have a primary residence where I do a telemedicine business in another state.
I had a W2 income job in the same year working for the federal government (VA/IHS type job) in the same state as my primary residence but in a different city 2 hours away
I must pay for housing and car now in the new place.
Can I deduct the expenses here for the W2 job like I could for the 1099 job?
The job was for less than 3 months
Thank you
No, you can’t deduct expenses for a W-2 job.
This is very interesting. I think I understand it, but I don’t think I’m getting the tax deduction benefit. I have W2 income and 1099. However, my 1099 is through an LLC that has set up as a sole proprietor. It’s a single member LLC. Because of that my accountant says all my 1099 income passes through and is taxed at my individual rate. I suppose that could mean my net income after those above the line deductions are made. All the know is that when I try to review the very complicated forms that he has filled out, my itemized deductions are still well below my standard deduction. It seems like I’m wasting my time saving receipts and combing through expenses when the standard deduction applies.
The itemized/standard deduction thing happens AFTER business deductions are taken out. Those come out before your gross income line and happen on Schedule C. You’re fine. You can take all your business deductions AND the standard deduction and be fine.
Quick question: If I make $270K/year in my W2 doctor job plus $30K/year doing med mal as a 1099 independent contractor—and both require me to be board certified costing $1,000…
Can I deduct all of the $1,000 expense off of my $30K IC 1099 income, or only 10% of it ($30K/$300K)?
Thank you for the great post!
While lots of people do deduct it all, the academically correct answer is to prorate it based on something, days worked vs dollars made or something.
makes sense–Thank you!
In my 50’s, from 2015 to 2022 (less one year of going to a different employer for a year in 2017) I had a sweet deal.
Paid malpractice
HSA partly funded with company money to cover the deductible on the FREE health insurance
A 401A at 5% of salary with full 5% match (vested in 6 years)
Access to a 457 (that I maxed)
30 days vacation AND 11 holidays
10 days CME and funds for conferences
(That’s 51 days off)
All outpatient and All weekends off with no call
Disability insurance
Life insurance
Dental/Vision insurance
Money put in a state fund (vested in 8 years) for state employees (I would have vested in this but for the one year misadventure…).
With this package, I was able to sell my weekends, take some paid call, put the max in a SEP, Max out the 401A, the 457, and the HSA with “over 50 catch up” numbers. This was usually about 90K pre-tax a year.
Best package at the best time. Just lucky.
I think doctors should try to get the best benefit package they can, and try to have a side gig to make extra $$ that allow them to max out all pre-tax money.
I like this discussion as we are working with several ER docs on this very analysis all the time. Our clients are the big contracting organizations who offer the 1099. The biggest issue people bring up is the medical insurance initially and comparing employer benefits verses what they can do on their own. As others have said in these comments, if your spouse works you should take his/her plan as the employer is subsidizing to some extent.
Glad to hear WCI’s results favor the 1099 in many cases, I find the same thing. The real beneficiaries are those who can do both.
I am a newly graduated W2 employed plastic surgeon in a private practice but am expected to cover the cost of some of my marketing (in the form of website, sponsorships and print ads) . I am paying for marketing costs with post-tax dollars. My practice currently reimburses me 50% of what I spend on marketing and pays me this via direct deposit (that I then pay income tax again on). I am trying to find a more tax beneficial strategy for this. Would this be considered earned income that I could write off as an 1099 independent contractor (I would be in the business of plastic surgery marketing) or via a LLC?
It’s a reimbursement, not income. You don’t pay taxes on it at all. The real bummer is the other 50% is an unreimbursed employee expense.
WCI,
Is there any general direction on what a reasonable salary is from the LLC side if you are also receiving a W-2 income? Note that W2 income is not through the same LLC. It seems to me that if you have W-2 income that is a full salary, and then have 1099 income on the side, you could say that all of your 1099 income should be released as distributions because your W-2 income provides your reasonable income. Is this true – or wishful thinking?
Thanks!
Some general rules for docs are make sure you pay yourself at least the maximum SS wage ($160K or so) and half your money should be salary. But the reality is that IRS just expects you to pay yourself a reasonable salary. So if a salary survey of your specialty says the 10th percentile is $220K, you probably shouldn’t try to use $150K.
In your situation, no, you can’t just say all the 1099 is distribution. You’re working for it in some way and a salary needs to be paid.
Don’t forget this really only matters if filing as an S Corp.